Micro, Small and Medium Enterprises (MSMEs), despite the important role played by them in the economic fabric of the country as they are the backbone of the Indian economy; continue to face constraints in obtaining adequate finance, particularly in terms of their ability to convert their trade receivables into liquid funds, infrastructure and logistics, entrepreneur skills. In order to address this pan-India issue through setting up of an institutional mechanism for financing trade receivables, the Reserve Bank of India had published a concept paper on “Micro, Small & Medium Enterprises (MSME) Factoring-Trade Receivables Exchange” in March 2014.

Based on the public comments received on the concept paper and the subsequent draft guidelines issued for setting up and operating the system and interactions held with relevant stakeholders, the following guidelines are being issued for setting up and operating the trade receivables system in the country. These Guidelines are issued by Reserve Bank of India under Section 10(2) read with Section 18 of Payment & Settlement Systems Act, 2007 (Act 51 of 2007).

What is TReDS?

The scheme for setting up and operating the institutional mechanism for facilitating the financing of trade receivables of MSMEs from corporate and other buyers, including Government Departments and Public Sector Undertakings (PSUs), through multiple financiers will be known as Trade Receivables Discounting System (TReDS).

The TReDS will facilitate the discounting of both invoices as well as bills of exchange. Further, as the underlying entities are the same (MSMEs and corporate and other buyers, including Government Departments and PSUs), the TReDS could deal with both receivables factoring as well as reverse factoring so that higher transaction volumes come into the system and facilitate better pricing. The transactions processed under TReDS will be “without recourse” to the MSMEs.

TReDS is an electronic platform that allows auctioning of trade receivable. The process is also commonly known as ‘bills discounting’, a financier (typically a bank) buying a bill (trade receivable) from a seller of goods before it’s due or before the buyer credits the value of the bill. In other words, a seller gets credit against a bill which is due to him at a later date. The discount is the interest paid to the financier.

As per RBI TReDS guidelines, only MSMEs can participate as sellers, while banks, non-banking financial companies and factoring companies are permitted as financiers.

How Does the System of TReDS Work?

A seller has to upload the invoice on the platform. It then goes to the buyer for acceptance. Once the buyer accepts, the invoice becomes a factoring unit. The factoring unit then goes to auction. The financiers then enter their discounting (finance) rate. The seller or buyer, whoever is bearing the interest (financing) cost, gets to accept the final bid.

Benefits of TReDS:

Ability to convert trade receivables into liquid funds.

Allows MSMEs to post their receivables on the system and get them financed.

Puts greater discipline on corporates to pay their dues on time.

Corporates enjoy savings on procurement cost through improved negotiation of financing term for its vendors.

Corporates save on the financing cost by extending their credit period and augmenting their payment cycle.

Financiers, on the other hand have an opportunity to build PSL asset portfolio.

The Reserve Bank of India (RBI) has given license to three entities to launch Trade Receivables Discounting System (TReDS) — a digital platform where small businesses (MSMEs) can get access to capital by auctioning their trade receivables and they are governed by the Payment And Settlement Systems Act.

Receivables Exchange of India (RXIL)

A Treds

Mynd Solution

Big Push: Linking TReDS to GST Network:

The linking of the Trade Electronic Receivables Discounting System (TReDS) to the GST Network (GSTN) is expected to increase the usability of the platform, remove the problem of fake bills, and give a huge fillip to a market that has the potential to reach INR 20,000 crore.

Chartered Accountants can play a very vital role in bringing system of TReDS by streamlining overall accounting system and GST System of such MSME thereby resulting into Growth of MSME and adequate financing thereby increasing productivity.